RIL cuts net debt to $14.2 billion in Q2, guides for a ‘significant slowdown’ in capex intensity in 2024

• Despite its attempts to lower debt, RIL’s free cash flows (post-interest) turned negative to ₹1,900 crore, due to the continued high capex.
• The September quarter’s capex was at ₹38,800 crore ($4.7 billion), but the company is also monetising assets through stake sales.
• RIL’s shares are trading at 18.8x its FY25 earnings, which is a 26% discount to peers, says Morgan Stanley.
  

Shares of Reliance Industries are down 10% this year, which is a significant underperformance compared to the broader markets. The conglomerate’s September quarter numbers have to be seen in light of this trend, as there are several reasons why investors are unhappy with the conglomerate and its unending capital expenditure. In Q2, the company attempted to address some of the investors’ concerns.

For starters, the net debt has peaked. RIL’s net debt is down sequentially to $14.2 billion and the company has also guided for a "significant slowdown in capex intensity in 2024". This financial year will see its net debt peak, despite its commitment to investing heavily in new energy businesses.

Morgan Stanley’s analysts believe that the monetisation of $35 billion capex is also expected to pick up, which could result in an attractive risk-reward situation. The global investment bank says: “...earnings quality was better than expected in terms of oil to chemical margins, growth in retail sales and reduction in net debt, with guidance for a slowdown in capex in capex intensity in 2024.”

The company’s elevated capital expenditure and negative free cash flows have irked investors for several quarters now. The company’s stock is reflecting this stress as well. While the September quarter also capex was at ₹38,800 crore ($4.7 billion), the company is also monetising assets through stake sales. The retail business has raised ₹15,300 crore. Consequently, Reliance reported its net debt was down by ₹8,000 crore over the last six months at ₹1.17 trillion.

Despite its attempts to lower debt, RIL’s free cash flows (post-interest) turned negative to ₹1,900 crore, due to the continued high capex. In the first half of FY24, RIL’s capex stood at ₹19,000 crore and interest cost was at ₹7600 in 2QFY24.

HSBC Global Research says: “We like Reliance’s business and balance sheet and believe all three of its core businesses – O2C, retail, and digital services – have become self-sustaining and cash-generating, with retail and digital growing strongly. Investment plans for new energy should kick-start another engine of growth but will likely require investment in the interim.”

The company’s capex intensity continues on both the retail and the digital businesses, but should see slowdown as 5G roll out begins by December 2023 and some retail assets potentially finding new investors. The O2C business will continue to report weakness due to macroeconomic factors and new capacity commissioning.

RIL’s shares are trading at 18.8x its FY25 earnings, which is a 26% discount to peers, says Morgan Stanley. RIL’s valuations are at a 10% discount to its five year average despite improving return on capital employed. The weakness in its O2C segmental earnings will continue to weigh on the stock. There is no surprise uptick expected in its wireless earnings either.